BCIS Infrastructure forecast

14 Nov 2017For discussion

Tender prices for civil engineering work are expected to rise by an annual 4% over the next three years*, by 5% in 2021 and then by 7% in 2022 as site rates rise sharply to reflect the difficulty in obtaining labour. This is against a background of historically high new infrastructure output. (*five-year forecast from 2nd quarter 2017 to 2nd quarter 2021).

The central forecast over the forecast period (2nd quarter 2017 to 2nd quarter 2022) is:

infrastructure construction output will rise by 34%

resource costs will rise 19%; and

tender prices will rise 26%.

New infrastructure output

Following falling output in the new infrastructure sector in 2016, it is anticipated that output will rise over each year of the forecast. In the first half of 2017, new infrastructure output rose by 8.2% compared with the first half of 2016, so it looks likely that output will increase in 2017 as a whole.

Over the upcoming two years, output is predicted to rise at about 4% per annum, with this slower growth mainly due to the cycle of large projects winding down before being replaced by new ones. In 2020 and 2021, output is expected to increase more sharply, with projects in the electricity, rail and roads sub-sectors being the key drivers of growth. Infrastructure output will remain at historically high levels.

Civil engineering costs are forecast to rise by 4% in 2nd quarter 2018 compared with a year earlier, and by 3% per annum over the following two years. Annual increases of 4% and 5% are forecast for the final two years of the forecast period. Cost increases will be driven by materials prices, particularly oil, and increases in wage awards driven by labour shortages in the later part of the forecast period.

There is still a great deal of uncertainty over the terms that will be agreed when the UK leaves the European Union. BCIS has produced forecasts for three scenarios. We are publishing the 'central' scenario as the forecast for the price and cost indices but it should be borne in mind that each forecast is equally possible.

There is still a great deal of uncertainty over the terms that will be agreed when the UK leaves the European Union. BCIS has produced forecasts for three scenarios. We are publishing the 'central' scenario as the forecast for the price and cost indices but it should be borne in mind that each forecast is equally possible.

Upside forecast

Over the forecast period (2nd quarter 2017 to 2nd quarter 2022):

infrastructure construction output will rise 40%

costs will rise 20%; and

tender prices will rise 31%.

Downside forecast

Over the forecast period (2nd quarter 2017 to 2nd quarter 2022):

infrastructure construction output will rise 11%

costs will rise 22%; and

tender prices will rise by 3%.

The scenarios are:

An 'upside' scenario based on the following assumptions – The UK remains a member of the EU but with no voting rights from cessation of the two-year period following the signing of Article 50. A 'transitional period' of two years follows, with continued payments to the EU (which will be deducted from the final 'divorce bill'). Negotiations run a lot smoother than with the 'central' scenario, providing investors with greater clarity at an earlier stage. It is assumed that following the end of the transitional period, any trade agreements with the EU will be the same as prior to the EU Referendum, and those with the rest of the world will boost the UK economy.

Sterling exchange rates are expected to remain depressed until the end of the transitional period, then return to pre-EU Referendum levels thereafter, with a consequential reduction in imported materials prices. Free movement of labour continues to the end of the transitional period, with an exemption on movement of operatives in the construction industry thereafter. It is assumed that it remains desirable for EU workers to work in the UK, and that demand for construction operatives in the EU remains unchanged. The economy picks up during the transitional period as confidence returns.

A 'downside' scenario based on the following assumptions – Based on the assumption that the UK has a 'hard Brexit' at the end of the two-year period following the signing of Article 50, i.e. from 1st quarter 2019. It is assumed that following withdrawal from the EU, any trade agreements with the EU are a lot less favourable than prior to the EU Referendum, and there are restrictions on the movement of labour.

It is assumed that Sterling exchange rates worsen, which adversely affects the price of imported materials and the desire of EU construction workers to work in the UK. The UK starts paying a 'divorce bill' from 1st quarter 2019. The economy goes into recession during the transitional period and only recovers at the end of the forecast period.

A 'central' scenario based on the following assumptions – The UK remains a member of the EU but with no voting rights from cessation of the two-year period following the signing of Article 50, i.e. from 1st quarter 2019. A transitional period of two years follows, with continued payments to the EU (which will be deducted from the final 'divorce bill'). It is assumed that following the end of the transitional period, any trade agreements with the EU are less favourable than prior to the EU Referendum.

Sterling exchange rates are expected to remain depressed until the end of the transitional period, then gradually return to pre-EU Referendum levels thereafter. Free movement of labour continues to the end of the transitional period, with restrictions in movement after that. It is assumed that it remains desirable for EU workers to work in the UK, and that demand for construction operatives in the EU remains unchanged. GDP recovers slowly towards the end of the period as confidence returns.

The terms 'central', 'upside' and 'downside' reflect the impact of the scenarios on construction demand.

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